You'llbe hearing a lot about the recession. But let's be honest. No one knows what's going to happen. What moves the economy is spending, and what causes people to spend -- or not to spend -- remains a puzzle. The Persian Gulf crisis further clouds the outlook. If everything were cut and dried, business cycles would be predictable and preventable. They aren't.
We are now in the gloom-and-doom phase. People recognize there's a recession and fear an economic free fall. Unemployment rises, and the newly jobless spend less. Business gets worse, and companies fire more workers. The slump feeds on itself. This sounds plausible, but it probably won't happen.
Since World War II, there have been eight recessions. The longest (1973-75 and 1981-82) lasted 16 months. Paradoxically, recessions also generate forces that promote recovery. Interest rates drop, encouraging borrowing and reducing debt burdens. Inflation recedes, increasing peoples' "real" (i.e., inflation-adjusted) purchasing power. Consumer and business confidence improves when people recognize their worst fears are exaggerated. Postponed purchases get made.
If this slump is an average postwar recession, it will:
Last 11 months. (This recession began in either late summer or early fall.)
Result in a drop of gross national product -- the economy's output of goods and services -- of 2.6 percent.
Increase the unemployment rate to a peak of 7.8 percent. (Already, it has jumped from 5.3 percent to 6.1 percent since June. There are now about a million more jobless than a year ago.)
Of course, no recession is exactly average. The Persian Gulf crisis defies forecasting. So much now depends on how war or peace affects oil prices, government spending and economic confidence. That said, few economists expect a repetition of the worst postwar slumps. In the recessions of 1973-75 and 1981-82, the unemployment rate reached peaks of 9 and 10.8 percent. What's different now is inflation. It's lower. This means that the Federal Reserve can loosen credit more rapidly to fight recession. Indeed, short-term interest rates have already dropped.
From here, the forecasts diverge. Most economists predict a mild recession. Typical is DRI/McGraw-Hill, which sees economic growth resuming in the second half of this year. Unemployment rises to 7.1 percent and then slowly drops to an average of 6.5 percent in 1992. Inflation subsides from 1990's 5.4 percent to about 3 percent in 1992.
In DRI's forecast, the economy's revival stems mainly from a pickup in consumer spending. There's no war in the Persian Gulf. Oil prices decline. Lower interest rates help families with adjustable-rate mortgages. All these developments bolster consumer confidence. In addition, a continuing expansion of exports (up 9 percent in 1991 and another 6 percent in 1992) cushions the recession and aids the recovery.
And the doubters? Well, they don't think the economy will resume growth until the fall. The unemployment rate could reach 7.5 percent. In this view, the government can't do much to revive the economy because the budget deficits prevent major tax cuts or spending increases. And a spontaneous recovery is stymied by huge personal and corporate debts.
Consumers curb spending as they struggle to meet monthly payments. Overborrowed businesses don't increase investment. Suffering from loan losses, banks restrict new lending. There are also some other problems. Layoffs and spending cuts by state and local governments act as a drag. Exports don't do so well, because the European and Japanese economies slow down.
Given the media's pessimistic bias, the gloomiest forecasts may get the most play. And there will be plenty of genuinely bad news. Slumps always hit the poor and the low-skilled hardest. Government services in impoverished cities will be squeezed further. More banks will fail. Some industries will suffer enormously. Because the 1980s were a period of overbuilding of offices, shopping centers and hotels, construction is already a disaster zone. In December, the industry's unemployment rate reached 14 percent.
But let's keep the bad news in perspective. In general, recessions are not economic calamities. Most people don't lose their jobs, and many unemployed find new work relatively quickly. In the depth of the 1981-82 recession, the average spell of unemployment was five months. That's a long time, but it's not forever. Finally, recessions often check inflation and inefficiency. Booms generate waste and speculation that recessions counteract.
This is clearly happening now. In addition to construction, big cutbacks are occurring in industries that overexpanded in the 1980s: retailing, financial services (banks, investment banks and brokerage houses), advertising, hotels and real estate. The shakeout is traumatic for the victims. But the survivors will be more productive, if only because there will be fewer of them left to share the business.
It's increasingly said that the economy has reached a major turning point. The crash of the commercial real estate market and the boomerang of the 1980s' borrowing are hurling us into an era of decline, stagnation and slow growth. The whole financial system is said to be shaky. We will pay in the 1990s for the sins of the 1980s. Maybe -- and then again, maybe not.
Each recession has its own novel features, which constantly fool the forecasters. They (and their computer models) presume that the past ordains the future. But the future is rarely so obliging. Our economic prophets speak loudly to disguise their ignorance. Business cycles conform to the larger tides of history, and history is always playing tricks. We should be wary of writing it in advance.